Darden to sell Red Lobster for $2.1 billion

Darden Restaurants said on Friday it has agreed to sell its Red Lobster casual dining chain and related real estate assets to investment firm Golden Gate Capital for $2.1 billion.

Shares of Darden fell $2.20, or 4.3 percent, to close at $48.49 on Friday.

The deal lets Darden shed its worst-performing chain to pay off some debt and focus on its flagship Olive Garden chain, which also has been struggling.

Darden will receive net cash proceeds, after tax and transaction costs, of about $1.6 billion for the seafood chain with 700 restaurants in the U.S. and Canada. Orlando-based Darden says it will use $1 billion to pay off debt and use the rest to buy back shares.

Sales at casual dining restaurants have been sluggish, with industry analysts blaming a general lack of innovation and also less appeal for younger consumers. Darden had considered various plans for unload Red Lobster, including a spin-off. Darden also approached real estate buyers about sale-leaseback financing for the business.

Golden Gate, a private equity firm in San Francisco, announced a sale-leaseback deal Friday, to reduce its exposure to Red Lobster’s real estate. In the $1.5 billion deal with American Realty Capital Properties for more than 500 Red Lobster restaurants, Golden Gate will sell the land and buildings to ARCP and lease them back.

Darden said it chose Golden Gate because it was an all-cash offer and the deal allows the company to maintain its current dividend of 55 cents per share, or $2.20 per year.

Red Lobster has been the laggard among Darden’s chains, which also include LongHorn Steakhouse and The Capital Grille. In the fiscal third quarter ended Feb. 23, Red Lobster’s sales at locations open at least a year fell 8.8 percent from a year ago to $611 million, and visits were down nearly 12 percent.

The company said that removing Red Lobster from its portfolio frees it to focus on reinvigorating Olive Garden, the company’s leading revenue generator.

“We believe this agreement addresses key issues that our shareholders have raised, including the need to preserve the company’s dividend and regain momentum at Olive Garden,” said Darden CEO Clarence Otis in a statement.